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CFA level1mock 2015 version 3 june AM solutions

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CFA Level I 3rd Mock Exam
June, 2015
Revision 1

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CFA Level I Mock Exam 3 – Solutions (AM)

FinQuiz.com – 3rd Mock Exam 2015 (AM Session)

Questions

Topic

Minutes

1-18


Ethical and Professional Standards

27

19-32

Quantitative Methods

21

33-44

Economics

18

45-68

Financial Reporting and Analysis

36

69-76

Corporate Finance

12

77-88

Equity Investments

18

89-94

Derivative Investments

9


95-106

Fixed Income Investments

18

107-112

Alternative Investments

9

113-120

Portfolio Management

12

Total

180

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2


CFA Level I Mock Exam 3 – Solutions (AM)

Questions 1 to 18 relate to Ethics
1.

Laura Elliot is a broker at Housegate, a broker-dealer firm. She undertakes trades
on behalf of clients with a high net worth. She discovers that one of her clients
has engaged in the embezzlement of portfolio funds, which classifies as an illegal
activity under domestic trading regulations. In order to comply with the CFA
Institute Standards of Professional Conduct, Elliot’s preliminary course of action
would be to:
A. request for a different assignment.
B. report the violation to her supervisor.
C. report the violation to regulatory authorities.
Correct Answer: B
Reference:
CFA Level 1, Volume 1, Study Session 1, Reading 2, LOS c
Upon learning of the illegal client activity, Elliot’s initial course of action should
be to stop the behavior by bringing it to the attention of her supervisor or the
firm’s compliance department. Should this prove unsuccessful, her next course of
action would be to disassociate herself from undertaking trades on behalf of the
client’s account. In the absence of any regulations, members and candidates are
not required to report violations to the concerned governmental or regulatory
organizations.

2.

The CFA Institute Code of Ethics requires members and candidates to:
A. encourage others to practice in a professional and ethical manner that will
reflect credit on the profession.
B. ensure the preservation of capital market integrity is given priority over
protecting employer interests.
C. use reasonable care and judgment to achieve and maintain independence
and objectivity in their professional activities.
Correct Answer: A
Reference:
CFA Level 1, Volume 1, Study Session 1, Reading 1, LOS b

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CFA Level I Mock Exam 3 – Solutions (AM)

Based on the CFA Institute Code of Ethics members and candidates must practice
and encourage others to practice in a professional and ethical manner that will
reflect credit on themselves and the investment profession. Additionally, members
and candidates must promote the integrity of and uphold the rules governing
capital markets. The requirement to place the importance of protecting market
integrity before employer interest is required by the Standards of Professional
Conduct as is the need to achieve and maintain independence and objectivity in
professional activities.
3.

Adequate compliance procedures should:
A. meet regulatory requirements.
B. ensure supervisors do not delegate their duties.
C. be designed to anticipate every potential violation.
Correct Answer: A
Reference:
CFA Level 1, Volume 1, Study Session 1, Reading 2, LOS c
Adequate compliance procedures should meet regulatory requirements.
The standard concerning responsibility of supervisors permits individuals to
delegate their supervisory duties but such delegation does not relieve them of their
responsibility.
However, procedures cannot be designed to anticipate every potential violation
which is why such a requirement is not imposed by the Code and Standards.

4.

Upon reviewing the materials received during the investigation of a professional
conduct inquiry, a designated officer’s preliminary course of action would be to:
A. revoke the member’s CFA charter.
B. suspend the member’s membership.
C. propose a sanction which can be rejected by the member.
Correct Answer: C
Reference:
CFA Level 1, Volume 1, Study Session 1, Reading 1, LOS a

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CFA Level I Mock Exam 3 – Solutions (AM)

After reviewing the materials obtained during a professional conduct investigation
a designated officer will propose a disciplinary sanction which can be accepted or
rejected by the member. If the sanction is rejected, the matter is referred to a
hearing panel whose task is to determine whether a violation has occurred and, if
so, what sanction should be imposed.
5.

Recommended written trade allocation procedures least likely include:
A. processing orders on a first-come, first-served basis.
B. allocating trades for new issues by portfolio manager.
C. giving all accounts participating in a block trade a weighted price based on
their order value.
Correct Answer: A
Reference:
CFA Level 1, Volume 1, Study Session 1, Reading 2, LOS c
Procedures for allocating trades to clients include:




6.

processing and executing orders on a first-in, first out basis;
allocating trades for new issues by allocating securities by client rather
than portfolio manager; and
giving all accounts participating in a block trade the same execution price.

Ella Lawson is the chief executive at Rome Bank, a commercial banking
enterprise. On behalf of the bank Rome will be providing funding to a
manufacturing enterprise seeking to expand its operations. During her visit to the
manufacturer’s factory, Lawson overhears two employees on the production floor
discussing the likelihood of their employer’s inability to carry out expansion.
Lawson holds shares of the enterprise and decides to sell her holding and reject
providing financial support.
Lawson is most likely in violation of the CFA Institute Standard of Professional
Conduct relating to:
A. loyalty, prudence and care.
B. diligence and reasonable basis.
C. material, nonpublic information.

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CFA Level I Mock Exam 3 – Solutions (AM)

Correct Answer: B
Reference:
CFA Level 1, Volume 1, Study Session 1, Reading 2, LOS c
Lawson is in violation of the standard relating to diligence and reasonable basis.
This is because the discussion between the two production employees and any
information shared is not credible enough to base her investment decision on.
Given that these individuals lack seniority, it is less likely they have access to
confidential information. Therefore basing her financing and share disposal
decisions on information, which is not credible will result in a decision which
lacks a reasonable and adequate basis.
Lawson is not in violation of the standard concerning material nonpublic
information. The specificity of the information, the extent of its difference from
public information, its nature, and its reliability are key factors in determining
whether a particular piece of information is material; the less reliable information
is, the less likely it is to be material. As discussed above, the fact that the
production employees are discussing a strategic issue whose likelihood of
occurrence is uncertain makes the information nonmaterial.
7.

Ace Associates is a hedge fund management firm generating above-average fund
performance for the past several years. The fund’s senior manager, Grace Singh,
is contacted by Jeremy Lewis, a self-employed portfolio manager, who is seeking
to allocate hedge funds to his client accounts. Lewis’s client base ranges from
those with imminent liquidity needs to wealthy entrepreneurs with insignificant
portfolio funding requirements. Singh signs an agreement with Lewis whereby
Ace’s management fee will be reduced for his clients in exchange for the
management of her personal account. Lewis does not disclose the arrangement to
his clients because they are expected to benefit.
Which of the following Standards of Professional Conduct is least likely being
violated?
A. Suitability
B. Referral fees
C. Misrepresentation
Correct Answer: C

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CFA Level I Mock Exam 3 – Solutions (AM)

Reference:
CFA Level 1, Volume 1, Study Session 1, Reading 2, LOS b
There is no evidence to indicate that the standard relating to misrepresentation has
been violated.
Lewis is in violation of the standard relating to suitability by allocating an illiquid
asset class (hedge funds) to the accounts of clients with imminent liquidity needs.
By not disclosing details of the arrangement between Lewis and Singh (charging
lower fees in exchange for portfolio management services), the portfolio manager
is in violation of the standard relating to referral fees. This standard requires
members and candidates to disclose any compensation, benefit or consideration
received from or paid to others for the recommendation of products and services.
8.

Paul Murray is preparing a report on the stock of a credit rating agency with two
other research analysts. Based on his independent discussion with the agency’s
executives as well as study of economic reports and surveys, Murray forecasts the
agency’s client base to shrink and deems a ‘sell’ rating as appropriate. However,
his colleagues disagree stating that Murray’s recommendation is too extreme and
that a ‘hold’ rating is more appropriate based on their in-depth historical industry
analysis of the impact of a shrinking client base on corporate performance.
In order to comply with the CFA Institute Standards of Professional Conduct,
Murray’s best course of action is to:
A. continue to identify his name with the research report.
B. request for the removal of his name from the research report.
C. not issue the report with his recommendation as it is based on material
nonpublic information.
Correct Answer: A
Reference:
CFA Level 1, Volume 1, Study Session 1, Reading 2, LOS c

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CFA Level I Mock Exam 3 – Solutions (AM)

Murray’s best course of action is to continue to have his name identified with the
report. This is because the recommendation derived from his colleagues has a
reasonable and adequate basis and he has no reason to doubt its independence and
objectivity. Therefore, he does not need to disassociate himself from the report.
Murray’s recommendation is based on the mosaic theory. He is using nonmaterial
nonpublic information along with information from public sources to derive his
recommendation.
9.

Jason Briggs is a portfolio manager serving Alliance. Based on a consultant
research analyst report Briggs will be undertaking a block trade for thirty client
accounts by purchasing a pharmaceutical corporate bond issue. The company is
categorized as highly risky with potential for strong returns. Using the firm’s
broker, shares of stock are allocated to each client’s account based on current
market price with commission being charged in proportion to account size.
Martha Lake is one of Briggs’ clients. The manager has decided to exclude her
account from the trade allocation. During a discussion with Briggs she states, “As
a child I had seen my parents undergo many financial hardships and so I am
somewhat apprehensive towards uncertain situations.”
Two months later, the pharmaceutical’s credit rating has improved. However,
Briggs deems the issue as still being risky for Lake and does not inform Lake of
the rating change.
Which of the following CFA Institute Standards of Professional Conduct are most
likely being violated?
A. Suitability
B. Fair dealing
C. Communication with clients and prospects
Correct Answer: B
Reference:
CFA Level 1, Volume 1, Study Session 1, Reading 2, LOS c

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CFA Level I Mock Exam 3 – Solutions (AM)

Briggs is in violation of the standard relating to fair dealing. This is because he
has not charged the same commission rate for all the accounts participating in a
block trade.
Briggs is in compliance with the suitability standard by excluding Lake’s account
from the block trade. Lake is not willing to participate in highly risky trades and
so the trade allocation will be unsuitable in light of her risk appetite.
Briggs is not in violation of the standard relating to communication with clients
and prospects. Given that the issue is still inappropriate for Lake’s account,
communicating the ratings change is unnecessary.
10.

Jason Lee is senior portfolio manager at Motto Trust, an asset advisory firm. To
enhance his tax management skills, Lee has been invited to attend a tax
conference which is sponsored by a tax advisory firm owned by one of his clients.
The client has offered to fully pay for transportation to the conference but Lee
declines and instead opts for his own arrangement. Lee informs his supervisor of
the conference invitation received before departing. At the conclusion of the
conference, the senior manager of the tax advisory firm invites Lee to an
exclusive golf club, which he accepts. He informs his employer about the
invitation upon returning to work the following day.
Has Lee violated any CFA Institute Standards of Professional Conduct?
A. No.
B. Only with respect to attending the conference.
C. Only with respect to accepting the golf club invitation.
Correct Answer: A
Reference:
CFA Level 1, Volume 1, Study Session 1, Reading 2, LOS c
Lee has not violated any CFA Institute Standards of Professional Conduct. By
declining the client’s offer to pay for transportation, he is in compliance with the
standard relating to independence and objectivity. Furthermore, he has not
violated any standard by accepting the golf club invitation. He had informed his
employer about his visit after his return. Also, given that knowledge of the club
invitation was not available beforehand, informing his employer upon returning to
the firm is the best course of action.

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CFA Level I Mock Exam 3 – Solutions (AM)

11.

Jessica March and Adam Pocock are CFA Level III candidates as well as
colleagues. The two candidates regularly study together for the Level III exam.
During one of their study sessions the two individuals engage in a discussion,
March: “Earlier in the year I had a discussion with Tim Martin, a Level III
candidate, who said that the most recent exam was very ‘difficult’.”
Pocock: “Difficult or not, with my relevant work experience, I am confident that
I will become a charterholder shortly following completion of the Level
III exam.”
According to the Standards of Practice Handbook, which individual is most likely
in violation?
A. March; she has shared confidential information with Pocock.
B. Pocock; he has made a guarantee regarding the receipt of the charter.
C. March; she has engaged in a discussion with Martin regarding the exam
contents.
Correct Answer: B
Reference:
CFA Level 1, Volume 1, Study Session 1, Reading 2, LOS c
March is not in violation of the CFA Institute Standards of Professional Conduct;
this is because she has not shared specific exam information concerning the
appearance of questions on the exam or any broad topical areas. Therefore she has
maintained the confidentiality of the CFA exam program.
Pocock, on the other hand, is in violation of the standard relating to reference to
the CFA Institute, the CFA Designation, and the CFA Program; this is because he
has made an explicit guarantee with respect to the final award of the charter; the
final award is subject to meeting the CFA Program requirements and approval by
the CFA Institute Board of Governors.

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CFA Level I Mock Exam 3 – Solutions (AM)

12.

Which of the following actions is least likely considered a violation of the
standard concerning Loyalty to Employers?
A. Soliciting clients prior to the cessation of employment.
B. Using a business plan generated for the employer to start a new business.
C. Applying specialized analytical skills gained at the previous employer in
the new workplace.
Correct Answer: C
Reference:
CFA Level 1, Volume 1, Study Session 1, Reading 2, LOS c
A member or candidate is not in violation by using skills and experiences gained
at the previous place of employment in the workplace.
Using a business plan generated for the employer to start a new business is
construed as self-dealing which represents a violation of the employer loyalty
standard.
Soliciting clients prior to the cessation of employment represents a violation of
the standards concerning employer loyalty.

13.

The criteria used when evaluating secondary or third-party research least likely
includes:
A. reviewing the assumptions used.
B. evaluating the quality of the researcher’s internal controls.
C. determining the soundness of the researcher’s established code of ethics.
Correct Answer: C
Reference:
CFA Level 1, Volume 1, Study Session 1, Reading 2, LOS b
The criteria used when evaluating secondary or third-party research includes:





assumptions used;
rigor of analysis performed;
date/timeliness of the research; and
evaluate the objectivity and independence of the recommendations.

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CFA Level I Mock Exam 3 – Solutions (AM)

14.

Harper Inc. is a financial services firm that was established on January 1, 2002.
The firm claims compliance with the GIPS standards on January 1, 2009.
In order to claim compliance, Harper Inc. initially:
A. Is required to ensure the financial years, 2002-2006, are in compliance.
B. Is required to ensure the financial years, 2002-2009, are in compliance.
C. can link non-GIPS compliant performance with GIPS-compliant
performance as long as disclosure is provided.
Correct Answer: A
Reference:
CFA Level 1, Volume 1, Study Session 1, Reading 4, LOS b
On January 1, 2009 Harper has been in existence for seven years. On claiming
compliance, the firm is required to initially present a minimum of five years
(2002-2006) of GIPS-compliant investment performance.
After the firm has presented the minimum of five years of GIPS-compliant
investment performance, the firm must present an additional year of performance
each year building a record of 10 years.
Firms are not permitted to link non-GIPS compliant performance with GIPScompliant performance after January 1, 2000.

15.

In order to prevent misconduct, the Standards of Practice Handbook recommends
members and candidates encourage their employers to:
A. restrict employee participation in IPOs.
B. establish written procedures for reporting violations.
C. disseminate a list of potential violations and disciplinary sanctions to all
firm employees.
Correct Answer: C
Reference:
CFA Level 1, Volume 1, Study Session 1, Reading 2, LOS c

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CFA Level I Mock Exam 3 – Solutions (AM)

In order to prevent misconduct, members and candidates should encourage their
employers to adopt policies which disseminate a list of potential violations to all
employees and associated disciplinary sanctions, up to and including dismissal
from the firm; this is recommended by the CFA Institute Standard of Professional
Conduct concerning misconduct.
Restricting employee participation in equity securities and IPOs is a
recommended procedure for compliance with respect to the standard concerning
independence and objectivity.
Encouraging their employers to establish procedures for reporting violations is a
recommended procedure for compliance with respect to the standard concerning
knowledge of the law.
16.

According to the Fundamentals of Compliance section of the Global Investment
Performance Standards, total firm assets must:
A. not include assets assigned to a sub-advisor.
B. include non-discretionary and discretionary assets.
C. be included in composites on the basis of their respective book values.
Correct Answer: B
Reference:
CFA Level 1, Volume 1, Study Session 1, Reading 4, LOS d
According to the Fundamentals of Compliance section, total firm assets must
include the fair value of all discretionary and non-discretionary assets managed by
the firm. This also includes fee- and non-fee paying portfolios.
Total firm assets must also include assets assigned to a sub-advisor provided the
firm has discretion over the selection of the sub-advisor.

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CFA Level I Mock Exam 3 – Solutions (AM)

17.

XYZ Inc is an investment management firm which claims compliance with the
Global Investment Performance Standards. Each year firm management selects
ten percent of prospective client requests and makes compliant presentations; this
policy is based on a first-come, first-serve basis. Due to limited resources, the
frequency of providing compliant presentations to prospective clients is annually,
at a minimum. Existing clients are provided an annual compliant presentation of a
composite only if their portfolio is included.
Which component of XYZ Inc’s compliant presentation policy is most likely
consistent with the requirements of the Fundamental of Compliance section of the
Global Investment Performance Standards?
A. The presentation policy for existing clients.
B. The first-come, first-serve performance presentation policy.
C. The frequency of providing presentations to prospective clients.
Correct Answer: C
Reference:
CFA Level 1, Volume 1, Study Session 1, Reading 4, LOS d
According to the fundamentals of compliance section, requirements include:




With respect to presenting performance to prospective clients, firms must
not choose to whom they present a compliant presentation; XYZ Inc’s
performance presentation policy is inconsistent with this requirement.
As long as a prospective client has received a compliance presentation
within the previous 12 months, the firm has met this requirement; XYZ
Inc’s policy with respect to the frequency of providing presentations to
prospective clients is consistent with this requirement.

The policy with respect to providing compliance presentations to existing clients
is a recommendation of the Global Investment Performance Standards.

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CFA Level I Mock Exam 3 – Solutions (AM)

18.

Which of the following is a section of the Global Investment Performance
Standards?
A. Hedge funds
B. Record retention
C. Wrap fee portfolios
Correct Answer: C
Reference:
CFA Level 1, Volume 1, Study Session 1, Reading 4, LOS c
Based on the options presented, wrap fee portfolios represents a valid section of
the Global Investment Performance Standards.

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CFA Level I Mock Exam 3 – Solutions (AM)

Questions 19 to 32 relate to Quantitative Methods
19.

A project with an opportunity cost of capital equal to the internal rate of return
should most likely:
A. have no impact on shareholder wealth.
B. be expected to increase shareholder wealth.
C. be expected to decrease shareholder wealth.
Correct Answer: A
Reference:
CFA Level 1, Volume 1, Study Session 2, Reading 6, LOS a
When the opportunity cost of capital is equal to the internal rate of return, the net
present value is zero. This implies that a project should have no impact on
shareholder wealth; i.e. it should neither increase nor decrease wealth.

20.

Grace Nicholson is choosing between two five-year investment plans with a
quoted rate of 8% and 12% respectively, each of which are compounded
continuously. Nicholson intends to invest $250,000 with the objective of
generating a minimum amount of $270,000 for her daughter’s college education.
She is not concerned with maximizing her return.
To achieve her objective, Nicholson will opt for:
A. either of the two savings plan.
B. the savings plan with a quoted rate of 8%.
C. the savings plan with a quoted rate of 12%.
Correct Answer: A
Reference:
CFA Level 1, Volume 1, Study Session 2, Reading 5, LOS c
Given that the returns for the two projects are compounded continuously, the
effective annual rate (EAR) needs to be determined.

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CFA Level I Mock Exam 3 – Solutions (AM)

EAR = e r∞ − 1
EAR = ($250,000)e(0.08) = $270,821.77
EAR = ($250,000)e(0.12) = $281,874.21
Given that both plans generate an amount within Nicholson’s range, she can opt
for either of the two plans.
21.

Equity investment styles will most likely be classified using a (n):
A. ratio scale.
B. ordinal scale.
C. nominal scale.

Correct Answer: C
Reference:
CFA Level 1, Volume 1, Study Session 2, Reading 7, LOS a
Equity investment styles are classified using a nominal scale because these scales
categorize data but do not rank them.
22.

Several of TA’s company employees are retiring today. They have each been
offered either to be paid a lump sum amount of $200,000 or an annuity with 30
payments of $15,000 starting from the date of retirement. TA’s bank has quoted
an interest rate of 8% compounded semi-annually.
If employees select the alternative that generates the greatest amount of wealth,
they will most likely:
A. opt for a lump sum amount.
B. opt for an annuity payment.
C. be indifferent between the two alternatives.

Correct Answer: B
Reference:
CFA Level 1, Volume 1, Study Session 2, Reading 5, LOS e

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CFA Level I Mock Exam 3 – Solutions (AM)

To determine which alternative will increase employee wealth, the present values
of both alternatives need to be determined.
Lump sum payment alternative’s present value = $200,000
Annuity payment alternative’s present value:
1 

1 − (1 + r )N 

PV = A
r






1


1 − (1 + 0.08 / 2 )29×2 
 = $336,444
PV = $15,000 
0.08 / 2







Employees will opt for an annuity payment alternative as it offers greater present
value.
23.

A discrete uniform distribution comprises of outcomes which:
A. take on a range of values.
B. are significant in number.
C. are equally likely in occurrence.

Correct Answer: C
Reference:
CFA Level 1, Volume 1, Study Session 3, Reading 9, LOS d
A discrete uniform distribution comprises of outcomes which are finite, equally
likely in occurrence, and take specific on specified values.
24.

A normal distribution is characterized by:
A. a skewness of 3.
B. the parameters mean, median and mode.
C. a linear combination of two or more normally distributed variables.

Correct Answer: C

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CFA Level I Mock Exam 3 – Solutions (AM)

Reference:
CFA Level 1, Volume 1, Study Session 2, Reading 9, Los m
Characteristics of a normal distribution include the following:




25.

it is described by two parameters, its mean and variance;
a skewness of zero and kurtosis of 3; and
a linear combination of two or more normal random variables is also
normally distributed.

Intermarket analysis:
A. assumes markets form repetitive wave patterns.
B. uses relative strength analysis to make allocation decisions.
C. is based on the principle that each market has unique characteristics.

Correct Answer: B
Reference:
CFA Level 1, Volume 1, Study Session 3, Reading 12, LOS h
Intermarket analysis uses relative strength analysis to identify sectors of the
market to invest in. Observations based on intermarket analysis can help in
allocating funds across national markets.
Intermarket analysis is based on the principle that markets are interrelated and
influence each other.
The Elliot Wave Theory assumes markets form repetitive wave patterns.

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CFA Level I Mock Exam 3 – Solutions (AM)

26.

The table below illustrates the covariance matrix for global equities, global bonds
and real estate held in the proportions 40%, 25% and 35% respectively, held in
Ricardo Segal’s portfolio.

Global equities
Global bonds
Real estate

Exhibit
Covariance Matrix
Global
Global
equities
bonds
125
150
150
45
80
90

Real
Estate
80
90
62

Based on the information, the standard deviation of Segal’s portfolio return is
closest to:
A. 5.93%.
B. 8.33%.
C. 9.93%.

Correct Answer: C
Reference:
CFA Level 1, Volume 1, Study Session 2, Reading 8, LOS l

σ 2 (R p ) = w1 2σ 2 (R1 ) + w2 2σ 2 (R2 ) + w3 2σ 2 (R3 ) + 2w1 w2 CovR1 R2 + 2w1 w3CovR1 R3 + 2w2 w3Cov(R2 , R3
= (0.40)2(125) + (0.25)2(45) + (0.35)2(62) + 2(0.40)(0.25)(150) +
2(0.40)(0.35)(80) + 2(0.25)(0.35)(90)
= 98.5575

σ (R p ) = 98.5575 = 9.93%

27.

In order to conduct hypothesis testing a:
A. significance level must be defined as a starting point.
B. decision rule must be stated prior to specifying the significance level.
C. statistical decision involves determining whether the null hypothesis is
accepted or rejected.

Correct Answer: C

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CFA Level I Mock Exam 3 – Solutions (AM)

Reference:
CFA Level 1, Volume 1, Study Session 3, Reading 11, LOS a
Making a statistical decision involves comparing the test statistic to the critical
value and determining whether the null hypothesis is accepted or rejected
accordingly.
The significance level must be specified before stating the decision rule.
Hypothesis testing begins with stating the hypotheses.
28.

The sample mean difference between the returns of two funds managing identical
emerging market equities is – 0.55% per quarter. The mean difference was
calculated using data observed over the past thirty quarters. The standard
deviation of the sample mean difference is 5.32%. The t-distribution table to be
used for the analysis is as follows:

Exhibit:
Student’s t-distribution Table
.05 (One tail)
.10 (One tail)
Degrees of freedom
.10 (Two tail)
.20 (Two tail)
28
1.701
1.313
29
1.699
1.311
30
1.645
1.282
Using a 10% significance level, the difference between the mean quarterly returns
is:
A. not significant.
B. significant; the calculated t-statistic of – 0.100 is greater than critical value
of – 1.699.
C. significant; the calculated t-statistic of – 0.026 is greater than the critical
value of – 1.311.

Correct Answer: B
Reference:
CFA Level 1, Volume 1, Study Session 3, Reading 11, LOS i

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CFA Level I Mock Exam 3 – Solutions (AM)

The calculated test statistic is – 0.10% [(- 0.55% - 0)/5.32%].
Given that this is a one-sided hypothesis test and based on 29 (30 – 1) degrees of
freedom, the upper and lower t-critical values are + 1.699 and – 1.699. The
calculated test statistic is greater than the t-critical value that implies that the
difference in mean quarterly returns is significant.
29.

Which of the following reasons most likely justifies why a parametric test may be
preferred over a nonparametric test?
A. The sample data is ranked.
B. The population has an infinite variance.
C. The distribution is defined by more than two parameters.

Correct Answer: A
Reference:
CFA Level 1, Volume 1, Study Session 3, Reading 11, LOS k
A nonparametric test is used in those situations where the assumptions of a
parametric test are not satisfied; that is, when the data are given in ranks, or when
the hypothesis we are addressing does not concern a parameter, or when the data
does not meet distributional assumptions.
30.

In contrast to a bar chart, the candlestick chart:
A. makes price volatility more visible.
B. indicates market volatility by the height of the candle.
C. illustrates opening, closing, high and low prices during a particular period.

Correct Answer: A
Reference:
CFA Level 1, Volume 1, Study Session 3, Reading 12, LOS b

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CFA Level I Mock Exam 3 – Solutions (AM)

An advantage of the candlestick chart over the bar chart is that price moves (price
volatility) is much more visible.
The bar chart indicates market volatility by the height of each bar.
Both the candlestick chart and bar chart show opening, closing, high and low
prices during the day.
31.

The exhibit below illustrates average monthly market price change for the ABC
Corp stock for the first seven months of the financial year 2013.

Exhibit: Average Monthly Price Change
For the First Seven Months
Average Price
Month
Change (%)
January to February
- 0.8
February to March
- 1.2
March to April
- 1.9
April to May
- 2.5
May to June
- 2.7
June to July
- 3.4
Based on the average price change, which of the following statements is most
likely correct regarding the ABC Corp stock?
A. Investors believe the stock’s intrinsic value is increasing.
B. The forces of supply and demand are roughly in balance.
C. Sellers are willing to accept lower prices to enter new short positions.

Correct Answer: C
Reference:
CFA Level 1, Volume 1, Study Session 3, Reading 12, LOS c
Since the market price is making lower lows, the ABC stock is undergoing a
downtrend. In a downtrend, supply is overwhelming demands and sellers are
willing to accept lower and lower prices to exit their existing position or enter
new short positions.

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23


CFA Level I Mock Exam 3 – Solutions (AM)

32.

Samuel Edgar is a technical analyst at Slater Associates, a market research firm.
He is analyzing price trends in the market price of the Elster Inc stock, a food
processor. His analysis of the market prices leads him to conclude that a head and
shoulders pattern is being observed. Using historical market prices, he constructs
a chart and observes that the share peaked at $45 and estimates the neckline at
$32.
To profit from the analysis, the share price should:
A. rise by $13.
B. decline to $19.
C. decline by $19 below the neckline.

Correct Answer: B
Reference:
CFA Level 1, Volume 1, Study Session 3, Reading 12, LOS d
The head and shoulders formation is a bearish indicator which suggests that a
technician would expect a previously established uptrend to end and a downtrend
to commence. To profit from an anticipated decline in security price, the analyst
will seek to short the security under analysis.
Based on the calculated price target, Edgar would anticipate the security price to
decline to $19 or $13 below the neckline (see below).
Price target = Neckline – (Head – Neckline)
= $32 – ($45 – $32) = $19

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24


CFA Level I Mock Exam 3 – Solutions (AM)

Questions 33 to 44 relate to Economics
33. Which of the following auction mechanisms will result in the highest bidder paying
a price equal to the second-highest bid?
A. Private value auction.
B. Descending price auction.
C. Second price sealed bid auction.

Correct Answer: C
Reference:
CFA Level 1, Volume 2, Study Session 4, Reading 13, LOS i
In a second sealed price bid mechanism, the winning buyer is the one who
submitted the highest bid but the price paid is equal to the second highest bid.
34.

Narita is a developing country experiencing rapid industrialization with a local
currency, NR. The living standards and household incomes are also improving
with many replacing motorcycles for automobiles. The demand function for
automobiles is given below. Pa is the price of automobiles, I equals household
monthly income, and Pm equals the per unit price of motorcycles. The household
income is NR 1,500 and the price of a motorcycle is NR 450. The market consists
of 5,000 consumers with this demand function.
Q d a = 40 − 2.3(Pa ) + 0.0007 I + 1.2 Pm

Based on the data provided and holding all else constant, the inverse demand
function is most likely:
A. 252.63 – 0.00009Qda.
B. 252.63 – 0.435Qda.
C. 200,000 – 11,500(Pa) + 3.5I + 6,000Pm.

Correct Answer: A
Reference:
CFA Level 1, Volume 2, Study Session 4, Reading 13, LOS g

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